Acme is also considering the acquisition of a firm in the Czech Republic and wou
ID: 2671669 • Letter: A
Question
Acme is also considering the acquisition of a firm in the Czech Republic and would like your opinion on this. It plans to operate the firm for 3 years and then reevaluate the holding.Free Cash flows are estimated as follows:
•Year 1 - 38.63M Czech Koruna (CZK), Year 2 - 44.33 M CZK,
•Year 3 - 50.48M CZK
•The third year terminal value is estimated at 375M CZK.
The Czech Koruna's exchange rate is assumed to be .038 USD/CZK for each year. Acme uses a WACC of 13 % for its domestic projects. So, the PV of the FCF's for the firm is 363.78 M CZK or $13.82M. The Czech firm has 1,000,000 shares outstanding and a debt to equity ratio of 1:1. Current market price is 185 CZK per share.
All monetary information (except per share) should be presented in CZK millions (i.e., do not convert to USD).
1.Should Acme make a deal if its policy is to never exceed a 20% premium in any tender offer? To defend your position, you must prepare and present an Excel template that includes the calculated fair value premium over market.
Explanation / Answer
Acme is also considering the acquisition of a firm in the Czech Republic and would like your opinion on this. It plans to operate the firm for 3 years and then reevaluate the holding. Free Cash flows are estimated as follows: Year 1 - 38.63M Czech Koruna (CZK), Year 2 - 44.33 M CZK, Year 3 - 50.48M CZK The third year terminal value is estimated at 375M CZK. The Czech Koruna's exchange rate is assumed to be .038 USD/CZK for each year. Acme uses a WACC of 13 % for its domestic projects. So, the PV of the FCF's for the firm is 363.78 M CZK or $13.82M. The Czech firm has 1,000,000 shares outstanding and a debt to equity ratio of 1:1. Current market price is 185 CZK per share. All monetary information (except per share) should be presented in CZK millions (i.e., do not convert to USD). 1. Should Acme make a deal if its policy is to never exceed a 20% premium in any tender offer? To defend your position, you must prepare and present an Excel template that includes the calculated fair value premium over market. Discount rate= 13% Year 1 2 3 3 FCF (million CZK) 38.63 44.33 50.48 375.00 (Terminal Cash flow) PV Factor 0.884956 0.783147 0.69305 0.69305 = (1+ 13.%)^1 = (1+ 13.%)^2 = (1+ 13.%)^3 = (1+ 13.%)^3 Total Discounted cash flow (CZK) 34.186 34.717 34.985 259.894 363.782 million CZK =0.884956x38.63 =0.783147x44.33 =0.69305x50.48 =0.69305x375 Value of the firm= 363.782 CZK Debt/Equity=1:1 Equity / value of firm= 0.5 value of equity= 181.891 million CZK Number of shares= 1 million So value/share= 181.890 CZK =181.891/1 Current market price per share= 185 CZK Hence fair value premium above market= 1.710% =(185-181.89)/181.89 As fair value premium over market 1.710% is less than 20%, So ACME can make a deal 2. What changes in the analysis or additional analysis do you suggest before a final decision should be made? Political risk may reduce the value of investment as ACME uses 13% for domestic projects. The additional risk from the foreign location of investment can be adjusted in following ways: 1) Discount rate adjustment: Take foreign risk as one problem by increasing the discount rate. A foreign investment premium is added to the discount rate. 2)Cash flow adjustment: Incorporate all foreign risk in adjustments to the free cash flow As terminal value of the investment may be difficult to assess due to difference in perspective because ACME policy can differ from Czech buyers trend So, We may be a need to adjust the terminal value. 3. Using the DCF methodology required in question 1, please take one of your suggestions and reevaluate the buy-out. To complete this question, you will have to present a second Excel template that includes your new assumed values and supports your recommendations. Further, please comply with the following: Assumptions must be reasonable
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